Zara: Changes Are in Store, but What Will They Mean for the Retail Chain?

Inditex, the Spanish textile giant, does not advertise, but it managed to make newspaper headlines in mid-March by announcing that it would change the image of Zara, its star retail chain, beginning with its New York location at 666 Fifth Avenue. Zara’s shops have always been the retailer’s best advertising medium: The company has spared no effort when it comes to choosing, designing and introducing new outlets to local populations, even bringing foreign journalists in to cover launches.

More than a year ago, Zara acquired the building on Fifth Avenue, where it recently inaugurated its new “look.” The property, which cost 247million euros (US$324 million) to acquire, was formerly occupied by the National Basketball Association. The acquisition broke Zara’s longstanding tradition of renting rather than buying. With more than 32,000 square feet of space on a total of three floors, it is the largest of the chain’s 57 stores in the United States, with 450 employees, five display windows and a façade that is more than 75 feet wide.

José María Cubillo, director of the marketing department at ESIC Business & Marketing School in Madrid, believes that beyond the spectacular building, the new location has been a hit from a marketing viewpoint. “New York is the capital of the world when it comes to fashion and trends; it sets the standards, and [Zara’s] presence there must reflect how high a position Zara has achieved as a business organization.” He adds that “Inditex surpassed the barrier of 100,000 employees in 2011. It has already created 9,374 new jobs in more than 5,500 stores in 82 countries, while becoming the largest apparel group in the world measured by profits and revenues.” In 2011, Inditex's net sales rose by 10% to 13.79 billion euros.

Esteban García Canal, professor of management at the University of Oviedo in Spain agrees that it makes sense to choose New York as a starting point to redesign the image of the Zara stores that will open around the world in the future. Garcia Canal recalls that the founder of Starbucks used to stress that three factors were critical for attracting customers: “Location, location and location. Locating on Fifth Avenue alongside such flagship stores as Harrods of London enables you to attract a lot of visitors.”

He adds that the store in the Big Apple is also going to play a key role within the Zara business model by identifying trends. That’s because every three weeks the various stores in the Zara chain send the company’s designers information about the products and prices that are most sought after by their customers. “[Zara’s] New York store is obviously one of its most important because [New York] is a very demanding market.”

TheThe new shop’s minimalist design lays out the clothes in spaces or “buckets” located along corridors, making it possible to clearly differentiate the various collections from one another. The effect is like having various small boutiques within the same store. Zara has also used lighting to highlight some items and to incorporate them into the store’s decor. In short, “They have attempted to enhance the product,” says Gerardo Costa, professor of marketing at ESADE in Barcelona. Especially interesting, he says, is “the reduction in shelving, since fewer products are stacked and more products are within view, [as well as] the separation between accessories and clothing” so people can see each item more clearly.

Beyond such details, Costa considers this modification in Zara’s image to be unsurprising because the company changes the clothing lines in its shops every 5 to 8 years. “The spectacular thing about their [new] design is the publicity that has been generated by the opening on Fifth Avenue.” That view is shared by José María Churtichaga, dean of IE School of Architecture in Segovia/Madrid, who notes that from a design point of view, the change is not very revolutionary. “Spanish firms are beginning to realize that they have failed to understand that [shop] design and user experience are like a lever in their businesses, just as they are for Apple in its stores. Up to now, not even Zara had been especially sensitive to this fact. "

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The Search for Differentiation

According to Costa, the change in image is consistent with how Zara has always managed its own output. “Zara is famous at the technical level because, for example, when they do their window displays, they try to avoid [any design elements] that make it hard to change the entire range of products overnight. They limit the use of photos and decor and so forth. That is to say, [they minimize use of] all those things that tie them to a particular collection for an entire season” or make it harder to manage the continuous replenishment of inventory.

For that reason, the company’s business model responds quickly to changes in market demand. Zara’s stores in any location around the world receive new products twice a week, always incorporating the latest fashion trends into their inventory, and adapting their offerings to the tastes and desires of their own customers. This supply chain agility,along with the company’s ability to provide well-designed clothes at a good price, explains the great success of the chain worldwide.

Cubillo adds that Zara has joined the new marketing trend of converting points of sale into destinations that enhance customer “experiences” through design elements and by enabling shoppers to pay via mobile phone and radio frequency (RFID) cards.

In short, according to Churtichaga, Zara has tried to engage in the new trend of “service design,” which involves designing the user experience inside the store so that it is unique — so that when customers leave the store, they won’t simply take with them a well-designed garment but will also feel happy about having chosen Zara.

Zara’s maxim is that it doesn’t want to sell a bargain to one customer during a single visit; it would rather have its customers visit the store quite frequently, notes Costa. While Zara’s competitors are looking to do a lot of cross-selling and “3×2” (“get three for the price of two”) discounts, what Zara wants, instead, is for its customers to come back every two or three weeks because they are aware that the retailer’s product lines are changing so often that products could quickly disappear if they don’t buy them soon. “When you are trying to attract consumers to your store every three weeks, the more distinctive and spectacular your store is, the better it is. Those who do not want to return because they believe the store is very expensive are not really your customers.”

Fundamentally, Costa believes that Zara’s new format is a lot like shopping at COS (Collection of Style), which was launched by the chain’s Swedish rival, H&M. The latter positions its products for the medium-high shopping segment and its stores provide a much more ambient experience. “It’s surprising how much resemblance there is between Zara stores and the stores of [COS]. Both of them try to create a more emotional effect,” he says.

Costa notes that the entire process of rebranding Zara involves trying to improve its shopping experience. Unlike H&M, Inditex “recognizes that it continues to be a manufacturer that has created a big supply chain, but it is still learning to manage [its own] stores. It’s as if they said, ‘We need to try harder when it comes to learning how to manage our stores, since that [skill] is not in our DNA.’”

Challenges for a Giant

The challenges still facing Zara can be put into two categories, notes Cubillo: investments and time. “Zara is already a giant, and this kind of [image renovation] process takes a long time,” he says. “Overall, it is estimated that it will take about nine years to completely transform the chain, as well as a great deal of capital.” Churtichaga agrees with this view, adding, “Once that period of time has been completed, depending on how rapidly the retail model evolves [over those years], it could turn out that this [new] concept for a store is already obsolete. This is something that Inditex will undoubtedly have to watch carefully.”

Costa warns of another immediate challenge for Zara: its goal to grow at a strong rate in the Asian market over the next decade. “Will consumers in that market be in favor of paying a bit more for other designer labels?" he wonders. According to Costa, the United States, which is also a target of Inditex, represents another challenge because it is a country of designers and fashion. "The New York store is [worth paying attention to], because what works in that city is The Gap, whose clothes are a genuine clothing commodity. It is very doubtful that [Zara] will enter the U.S. and compete against The Gap on the basis of price. [If I were Zara] I would differentiate myself on the basis of design [rather than price].”

On the other hand, as Costa notes, Zara is starting to operate on all five continents, so they are duplicating their collections and dealing with the resulting challenges that this involves for logistics, which is one of the strong points of their business model. This means that when it is summer in Europe, “Zara needs to be making its winter collection for Argentina. To get to Asia, the United States and so forth, its model [which involves] continuously replenishing its stock, leads to higher [logistical] costs. Or they can reduce their [logistical] agility and move toward a model that is more like that of [Swedish retailer] H&M” which involves less frequent replenishment of its inventory but lower costs. “Or [Zara can] maintain their excellence at worldwide logistics in two seasons, even if that will mean higher costs [for them].”

Differentiation Through Pricing

Although consumers continue to experience the fallout of a global recession, experts predict that Zara will not choose to reduce its prices. Recently, Mango – Zara’s largest rival in Spain — announced that it will lower prices of its goods by 20% in response to the adverse economic environment in the country.

Cubillo warns that “a structural decline in prices, if it is poorly communicated, can wind up having a pernicious impact on a company’s brand image. Lowering your prices is not a solution.” In his view, you have to learn how to apply a policy of containing prices during economic boom times so you don’t have any regrets during a crisis. Any failure to do so will lead to a misalignment between the value that you deliver to your customers and the prices that you charge for your products. “Whenever an economic crisis comes, customers adjust their budgets, reconsider what their tastes are, try to balance those two factors, and then take a fresh look at the value-price relationship provided by their usual suppliers. When people find out that a particular brand is over-charging them, it can lead to profound disappointment with that brand. That is more than enough reason for customers to end their loyalty to the brand.”

In his view, Mango’s recentdecision is a competitive devaluation in the making. That is to say, “it is as if [Mango were] recognizing that its prices had been overvalued by 20%, although what they had communicated was different. It is tantamount to admitting that your customers are not willing to pay that extra 20% for Mango garments and that, in response to the crisis, they need to re-adjust (or equalize) the existing relationship between the value that they deliver and its corresponding price.”

Experts believe that Zara will not get itself into a low-cost price war. On the contrary, they are trying to improve the positioning of their brand with their new store design concept by creating something that is distinctive from their large competitors. “Those who compete on the basis of price are going to have problems because they will appear to be very cost-effective players,” notes Costa. Nowadays, “Everyone loses customers on the basis of price, and wins them on the basis of design and style,” Costa adds. “It may seem coincidental, and yet it is highly significant that in the same month when Mango says that it will play the price card, the global leader (Zara) plays the card of [providing] the most distinctive store.”

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